Venture Capitalists Predict a Difficult 2009
NVCA Annual Survey Forecasts Challenges for Venture Industry in the Coming Year
WASHINGTON, DC -- (Marketwire) -- 12/17/08 -- U.S. venture capitalists are forecasting adifficult 2009 for the country's economy, the capital markets, and theventure industry as the global financial crisis takes its toll on theentrepreneurial ecosystem. According to the respondents of the thirdannual National Venture Capital Association (NVCA) Predictions Survey, thecoming year will be met with a slowdown in investing across most sectorsand a continued weakened exit market. However, most VCs surveyed predict arecovery in 2010 when the IPO market is expected to re-open and thosecompanies and venture firms that weathered the storm will emerge strongly.
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"2009 will be a year of anticipation for the venture capital industry asthe economic turmoil will engender a fair amount of Darwinian change," saidNVCA President Mark Heesen. "The recession and shuttered IPO market willplace tremendous pressure on portfolio companies to tighten their belts andre-tool where necessary. We will likely see a marked slowdown of newinvestments as venture capitalists turn their attention to supporting theseexisting companies. That said, most venture capitalists will say that adown market is the best time to invest when valuations and competition arelower. There is no recession on innovation and great ideas will still getfunded -- especially in sectors that have more insulated demand such asclean technology and life sciences."
The NVCA survey was conducted from November 24 - December 12, 2008 andincludes the predictions of more than 400 venture capitalists from acrossthe United States.
Venture Investment Predictions
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Ninety-two percent of venture capitalists are predicting a slowing ofventure investment in 2009, compared to 2008, which is expected to reachthe $29 to $30 billion range by year end. Sixty-one percent of respondentsbelieve the decline will be greater than 10 percent and fall below $27billion in 2009. However, more than half (53 percent) predict that theywill invest in the same or more portfolio companies in the coming year,suggesting overall lower dollar rounds.
Despite lower investment predictions across all industry sectors, cleantechnology is viewed by the highest percentage of respondents aspotentially growing in 2009 with 48 percent predicting increased investmentand 20 percent predicting unchanged investment. The life sciences sectoroffered the second highest promise for investment stability and/or growth.Twenty-five percent of respondents believe biotechnology will increase and33 percent predicted stable investment. In the medical device sector, 24percent believe investing will increase while 38 percent predict stableinvestment. The strongest consensus for investment decline is predictedfor the semiconductor industry with 79 percent expecting a decrease ininvestment. Media/entertainment and wireless communications investing arealso expected to decline with 71 and 60 percent of all respondentspredicting slowdowns in those sectors respectively.
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Venture capitalists are predicting a slowdown in seed and early stageinvestment in 2009 with 60 and 64 percent of respondents indicatingdeclines in those company stages respectively. These predicted declinesare reflective of the dismal exit market and the inability of venturecapitalists to make substantial new investments of time and money.
Venture capitalists are also predicting a slowdown in global investmentwith more than half of the respondents expecting declines in every majorforeign region. The outlook is particularly grim for Europe where 74percent of respondents believe there will be a decrease in ventureinvestment. The outlook in other countries is split with 56 percentpredicting a decline in Israel and India and 51 percent predicting declinesin China.
Almost all venture capitalists (96 percent) predict it will be harder fornew companies to get funded in 2009. Additionally, 93 percent of all VCrespondents believe that it will be harder to sustain existing portfoliocompanies in the coming year.
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Venture Capital Funds Outlook
While 96 percent of VCs predict that more venture firms will not be able toraise money in 2009, a lower percentage, 85 percent of respondents, believeinstitutional investors will reduce commitments to venture capital assetclass.
"While many existing institutional investors are struggling with theirallocations and future investment decisions, we will see new limitedpartners, many from overseas, enter the U.S. venture capital industry, saidHeesen. "Despite the fodder, we do not anticipate massive failures oflimited partners to make capital calls. Many will sell their positions onthe secondary market out of necessity. Yet, that will just change the mixand allow other institutional investors access to funds they could notaccess in prior cycles. High quality venture firms will be adequatelyfunded going forward."
Those venture capital firms that have recently raised money in the last twoyears will likely not need to fundraise in 2009. However, those that wereplanning to fundraise this year may be re-evaluating the timing andpostponing these efforts until market conditions improve.
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Venture-Backed Exit Market
An overwhelming number of venture capitalists (72 percent) do not expectthe IPO market to re-open for portfolio companies until 2010 or beyond. Amore optimistic 18 percent see the market opening in the fourth quarter of2009. While venture-backed acquisition volume is expected by 57 percent ofventure capitalists to remain the same or increase, 87 percent ofrespondents predict that acquisition transaction value will decline.
These market challenges will take their toll on the venture capitalindustry's performance, particularly in the short term (3-5 years) where 92percent of the respondents surveyed believe venture returns will decline.The majority of venture capitalists surveyed (83 percent) believeperformance will suffer in the longer term (5-10 years).
Venture capitalists are equally pessimistic about the overall economy with81 percent predicting that the economy will remain the same or worsen in2009. Only 15 percent predict that the Dow Jones index will be above10,000 in the coming year.
"Most venture capitalists are predicting a very difficult 2009 butanticipating a much improved 2010," concluded Heesen. "Those firms andcompanies that can weather this storm -- and there will be those that donot -- will emerge strongly. Venture capital backed companies represent acritical engine of economic recovery for this country. It is in everyone'sbest interest that theses companies continue to prosper, creating jobs andbringing innovation to market."
For survey charts and highlights as well as a compilation of NVCA memberpredictions for 2009, please contact Emily Mendell at emendell@nvca.org orLaura Cruz at lcruz@weisergroup.com.
The National Venture Capital Association (NVCA) represents approximately450 venture capital and private equity firms in the United States. NVCA'smission is to foster greater understanding of the importance of venturecapital to the U.S. economy and support entrepreneurial activity andinnovation. According to a 2007 Global Insight study, venture-backedcompanies accounted for 10.4 million jobs and $2.3 trillion in revenue inthe United States in 2006. The NVCA represents the public policy interestsof the venture capital community, strives to maintain high professionalstandards, provides reliable industry data, sponsors professionaldevelopment, and facilitates interaction among its members. For moreinformation about the NVCA, please visit www.nvca.org.
